Termination payments: removal of foreign service relief for UK residents
19 September 2017
Employees who are UK resident in the tax year their employment is terminated won’t be eligible for foreign service relief on their termination payment from April 2018.
Draft legislation has been published which will ensure employees who are UK resident in the tax year their employment is terminated won’t be eligible for foreign service relief on their termination payment.
Reductions in the case of foreign service (sometimes referred to as 'foreign service exemption') is retained for seafarers.
Foreign service relief currently allows qualifying individuals to be either completely exempted from Income Tax on their termination payment or have the taxable amount reduced.
Those who have worked abroad but are resident in the UK in the year their employment is terminated will be taxed in the same way as others who haven’t worked abroad. They will continue to benefit from the existing £30,000 Income Tax exemption and an unlimited employee National Insurance contributions (NICs) exemption for payments associated with the termination of employment. The rules on Income Tax and employer NICs for termination payments are aligned so that employer NICs will be payable on payments above £30,000 (which are currently only subject to Income Tax).
The measure will have effect from 6 April 2018 and will apply to those who have their employment contract terminated on or after 6 April 2018.